Bill Gross, one of the world’s most famous bond investors, has had a “stinker” of a year. The 67-year-old’s performance this year has been so bad that he recently took the unusual step of publishing a newsletter entitled “Mea Culpa”, to apologise.
Earlier this year, Gross, whose PIMCO Total Return fund is the world’s biggest bond fund, made a highly-publicised bet against US Treasuries. He predicted that America’s increasing fiscal disorder would cause investors to lose faith in Treasuries. He also expected the cessation of the Fed’s bond-buying programme (quantitative easing) – which stopped at the end of June – to weaken demand for T-Bills. So what went wrong?
“The simplest explanation”, says Gross, is “the global flight to quality” triggered by the European debt crisis and America’s economic problems.
Scared investors rushed to US Treasuries, pushing up their price. Gross missed out on the bonanza, which explains why his fund returned just 1% year-to-date, compared to a benchmark average of almost 4%.
“As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies towards a potential recession, the Total Return Fund had too little risk off and too much risk on.”
Another problem was that “too many of the Treasuries we did have were inflation-protected TIPS – securities that tend to shine during periods of even moderate growth and potentially higher inflation – but tend to lag during quarters when recession – and lower inflation become more likely.”
In short, “this year is a stinker”, admits Gross. Yet investors are unlikely to lose faith in ‘the bond king’ just yet. Over the past 15 years his returns have been in the top 1% of his peer group, say fund researcher Morningstar. Gross is now predicting developed world economic growth of 0% “over the coming several quarters” and says he has adjusted his portfolio accordingly.